Discounted present value, Financial Accounting

A player for a Rice team, Jim Jones, is graduating this year and is considering a career in professional sports. The alternative is to work for two years and then attend business school for two more years before taking a job in finance. The professional sports career involves an up-front signing bonus of $500,000 followed by guaranteed salaries over the next ten years of $750,000 per year (in real yearend values starting at the end of the first year). Assume that the professional sports career ends after 10 years, at which time Jim could expect to earn an income of $75,000 per year (in real terms) growing at 1 % per year for the next 30 years. The business career would involve earning $75,000 this year, $78,000 next year, and spending $30,000 per year for the following two years while attending business school (all amounts measured as end of year real values). Upon graduation, however, Jim could expect a starting salary of $140,000 (in year-end values) growing at 7.5% (in real terms) for the next 35 years.

(a) If the appropriate annual effective discount rate is 4.5%, show that the earnings stream associated with the professional sports career has the larger discounted present value.

(b) If Jim desires to maintain a constant level of annual consumption at a discount rate of 4.5%, what would his annual real consumption be?

(c) What financial assets should Jim have at the end of his first year of employment?

(d) How much should Jim have invested the year that he ceases being a professional athlete?

Posted Date: 2/22/2013 4:48:34 AM | Location : United States







Related Discussions:- Discounted present value, Assignment Help, Ask Question on Discounted present value, Get Answer, Expert's Help, Discounted present value Discussions

Write discussion on Discounted present value
Your posts are moderated
Related Questions
Show all support work for your calculations. 1.  Simple Interest versus Compound Interest [LO1]  First City Bank pays 7 percent simple interest on its savings account balances,

Order Point Formula The analysis discussed above tends to be somewhat cumbersome when probability distributions are most complex and dependent and multi-period cases are involv

Q. Determine expected future cash flows? A rights issue will be a smart source of finance to Tirwen plc as it will reduce the gearing of the company. The current debt/equity ra

AsIDENTIFY THE MAIN PROVISIONS OF THE PARTNERSHIP ACT k question #Minimum 100 words accepted#

depreciation in question is given more and in adjustment is less. What would be in the profit and loss account?

Answer both parts of this task. Part (i) is worth a maximum of 5 marks and Part (ii) is worth a maximum of 10 marks. (i) List the elements of the tort of negligence. (ii) Enr

What role does accounting play in the planning, implementation, analysis of CSR in particular and organizational strategies in general?

When Lydia started her vending machine business, she instituted flexible budgeting for the first few months of operations. Her first monthly budget numbers were these: Cost of g

Division of the trust The safeguards consist in the division of the trust funds into portions.  Before this division takes place, the investments are revalued in order to deter

First's current stock price is $260. The price may rise to $300 or fall to $170 in one month. The risk-free interest rate is 18% per year. a. Using the replication portfolio app